In the aftermath of the Global Financial Crisis, Mark Carney, the former Governor of the Bank of England, coined the concept of a “social licence” for financial markets and, in the Forward to David Rouch’s book, he commends Rouch for the progress he has made in defining a framework for this social licence.
Rouch’s basic thesis is concisely summarised in a six-page overview at the start of the book. He acknowledges that “Capitalism in one form or another is the only realistic option for meeting a host of human needs” (page xx). However, he also recognises that there has been a breakdown of trust of the kind that Mark Carney has identified and that “the usual toolkit of laws and regulations has been powerless to heal the fracture between the financial sector and surrounding society” (page xx). He suggests that the view that financial markets are really only about money-making is wrong and that recognition of a social licence is “both an observation about the relationship between finance and society and an expression of aspiration about how it could be at its best” (page xxii). Rouch wants to ensure that this recognition becomes universal and argues that paying attention to it “has the potential to help reorientate the individual relationships that comprise the wider relationship between finance and society, by strengthening positive reciprocity” (page xxiii). This, in turn, leads to various policy proposals designed to bring an overarching “social licence” narrative to financial market practice and regulation.
The resulting book is not an easy read. Rouch expresses the hope that traders, directors, lawyers, campaigners, regulators, academics, politicians and policy makers will approach finance differently as a result of what they read in it but even many of them will find it heavy going. Some parts are highly specialist (the 22 page “Written Standards Map” at the end of Chapter 5 being an extreme example of this), the language throughout is complex and a lot of the book is devoted to discussions of psychological, sociological and philosophical issues (e.g. theories of group behaviour and human motivation and concepts of human dignity and justice).
Rouch appears to be conscious of this issue and provides what he describes as a “Fast Track” summary at the start of each chapter, which sets out the key messages of the chapter and its main implications. He also frequently reminds the reader of what has been said earlier in the book and points to the direction of travel of his argument. Unfortunately, however, these devices do not completely solve the problem and they result in both a significant amount of repetition and an over self-conscious stress on the structure of the book.
Those who persevere will, however, find much food for thought and, probably, plenty to applaud in what Rouch says. Most fundamentally, he is surely right in asserting that markets are in fact, and should be, about more than simply making money. The knee jerk reaction of people (including market participants) to the effect that they care about nothing other than money can be proved to be wrong not only by reference to modern behavioural psychology but very simply through questions and answers posed to market participants. Moreover, the suggestion that markets should have a broader purpose is consistent with most major ethical systems, whether religious or secular.
Rouch is also surely right in recognising the power of ideas, or “narratives” as he calls them. If people believe that they are operating in a dog-eats-dog world constrained only by a jumble of complex regulations, they will behave differently and they would if they believed that they were working in an environment having a broad social purpose in which the relevant rules are, however imperfectly, reflections of that purpose. Furthermore, market and corporate culture exerts its own pressure for good or for ill. In part, these things explain why good people do bad things or, conversely, why even bad people may be constrained by the culture in which they find themselves.
In this connection, it is good to see Rouch acknowledge “the idea that legally enforceable regulatory rules that overlap with aspirational standards may diminish the force of the latter” (page 189) as well as the fact that “you cannot ultimately legislate for a sense of urgency. Nor can you force people to have a healthy relationship or to be trustworthy” (page 9). It is also encouraging to see his repeated references to issues of trust, which recognise that market behaviour comes down to the actions of individuals and groups of people and that relationships are key to the achievement of desired outcomes.
That said, there is a serious problem at the heart of the book: Rouch’s definition of “the social licence for financial markets” is vague. Indeed, he himself recognises that “Defining the substance of the social licence is … challenging” (page 133). He frequently says what it is not: It is “not a ‘mere’ metaphor” (page 113), it is not a “social contract” (page 115) and it is not to be identified with the “social licence to operate” that has been perceived in relation to other industries, particularly extractive industries (page 117). Furthermore, it is not to be identified with the legal authorisations which are required in order to be a market participant. It is, on the contrary, something that is granted by society as a whole and it “can be treated as granted to the extent that those in society have given their justified trust to financial operators, trust based on solid reasons for believing that those in financial markets will carry on business in a way that is consistent with the licence” (page xxii). It comprises “a freedom to pursue just ends by just means in financial markets, where justice is a situation in which the human dignity of market participants and those affected by their activities can be experienced most fully” (page xxii, italics in the original).
Almost every element of these statements gives rise to serious issues. For example, since most members of society (including many who are well educated) will have little idea of what the financial markets do let alone how they operate, in what sense can they be said to give “their justified trust … based on solid reasons”? In any event, what society are we talking about? Rouch appears to be having regard to nation states (or, perhaps, some super-national entities like the European Union) but is that realistic in a modern globalised world? Equally seriously, since there is no common understanding of the concept of “just” behaviour in society (see, for example, “What is Economic Justice?” by Andrew Hartropp), how can this form the basis of an adequate definition of the social licence?
Rouch acknowledges some of these difficulties, including the lack of consensus in relation to some key concepts such as the nature of “justice”, (page 135) but he believes that there is sufficient high-level consensus to render the concept of the social licence itself viable. Unfortunately, however, one may legitimately doubt whether this is true and ask whether the vague language of “social licence” has the effect of generating the appearance of agreement among those who use the term, without its reality. For example, as Hartropp demonstrates, an approach to justice that is based upon rights or needs will necessarily arrive at completely different conclusions from an approach that is based on due rewards or deserts and concepts based on justice in production will talk of completely different things from a concept based on justice in distribution (which, incidentally, Rouch appears to adopt).
There also seem to be problems in evaluating the role of laws and regulations in relation to the “social licence”. Rouch regards these laws and regulations as both evidence for such a licence and, to some extent, indicative of the terms and conditions of the licence. However, it is surely arguable that ever increasing regulation is indicative of the withdrawal or, at least, restriction of the terms of the “licence” rather than evidence of its grant. Furthermore, Rouch relies heavily on written materials produced by a variety of sources as the evidence of the terms of the licence and one is left with the impression that he has simply included “soft law” and related matters within his concept without really altering the regulation-based framework which he has previously recognised to be inadequate.
Some other questionable aspects of Rouch’s underlying analysis are less fundamental but nonetheless important in relation to the impact of his proposals. In particular, he places great stress upon the need to promote “other regarding behaviour” in contrast to “self-interest”. This is obviously morally right but, as Adam Smith long ago famously demonstrated, the two categories are not completely discreet. The building of trust may involve “other regarding behaviour” but, as Rouch recognises, it is absolutely necessary in business relationships and even the most self-interested person will need to have regard to this in order to advance their own interests. Similarly, most people have a desire for the approbation of others and this too may involve behaviours that, from one perspective, are other regarding but, from another perspective, are self-interested. In places, Rouch appears to acknowledge this and he clearly does not believe that the pursuit of profit is wrong in itself but, if his goal of widespread recognition of the “social licence” is to be realised, it would be desirable to avoid an undue bifurcation of motivations and instead to ensure that the narrative recognises that self-interested and other regarding behaviour are not in opposition as often as may sometimes be thought.
As one reaches the end of the book, one is left with a nagging feeling that the concept of a “social licence” is too vague and hard to get hold of for it to be capable of comprising the compelling narrative that Rouch rightly believes to be necessary to replace the distorted narrative of unbridled self-interest that is often wheeled out even by those within the financial markets. Might it not be better to focus on a simpler narrative?
Such a narrative might commence by focussing (as the book does) on the clearly evidenced positive role of financial markets within society, thus addressing both self-esteem of those within the markets who desire to be doing something worthwhile and the misplaced hostility of some outside; it might demonstrate how the aspirations of organisations operating in the financial sector and the personal aspirations of those who work for them (including financial aspirations) are advanced rather than held back by “other regarding behaviour”, which (as Rouch also agrees) is thus not code for abandoning the pursuit of profit let alone a demand that financial institutions turn themselves into quasi-charities; and it might stress some simple ethical values that are neither obscure nor disputed among reasonable people.
In doing this, the narrative could build on concepts that are well understood, widely accepted and of proven worth such as the hard monetary value of trust and brand reputation, the role of client/customer focus in developing this, the need for long term business sustainability and the motivational impact on staff of being an organisation that is known for its high standards, including ethical standards.
Such an approach would focus on the culture of financial services organisations rather than metaphysical concepts. It would avoid the obscure language of the “social licence” with the negative over-tones of constraint and implicit threat that may be perceived in it and replace it with a simpler and more positive narrative which invites participants in the financial markets to take pride in what they are doing and recognise that they will best prosper, both financially and otherwise, in an environment that is ultimately beneficial to society as a whole.
“The Social Licence for Financial Markets” by David Rouch was published in 2020 by Palgrave Macmillan (ISBN 978-3-0-30-40219-8) 327pp excluding bibliography.
Richard Godden is a Lawyer and has been a Partner with Linklaters for over 25 years during which time he has advised on a wide range of transactions and issues in various parts of the world.
Richard’s experience includes his time as Secretary at the UK Takeover Panel and a secondment to Linklaters’ Hong Kong office. He also served as Global Head of Client Sectors, responsible for Linklaters’ industry sector groups, and was a member of the Global Executive Committee.
“The Gospel at Work” by Sebastian Traeger & Greg Gilbert is a relatively recent addition (published 2018) to the cohort of literature that aims to focus on faith within the workplace. This is a topic that likely stirs interest from secular and religious audiences alike. What role does a person’s faith have at work? How should work be understood by Christians? How can we develop a biblical understanding of work? These are just a few of the main questions addressed in the book.
The authors bring together relevant and varied knowledge on the issue. Sebastian Traeger is a former technology entrepreneur and current Vice President of the International Mission Board for the Southern Baptist Convention. Greg Gilbert is the author of several books and currently serves as the senior pastor of Third Avenue Baptist Church in Louisville, Kentucky.
The central message or ‘thesis’ of the book is that, regardless of your job, you are ultimately working it for God, “Who you work for is more important than what you do” (page 17). This is, as the book points out, contrary to what “the world” considers successful and important.
The premise is based on the words of the apostle Paul in Ephesians 6:7 where he calls to “Serve wholeheartedly, as if you were serving the Lord, not people”. Yet the focus is not just on the action itself, but also the attitude of heart. In Colossians 3:22 Paul calls people to work with “…sincerity of heart and reverence for the Lord” (page 16).
“The Gospel at Work” is devised into eleven main chapters and here we will touch upon some of the main points that arise.
Chapters I and II start with a dichotomy that sets the tone for the rest of the book: “The Idolatry of Work” versus “Idleness in Work” (pages 13 & 23). Traeger and Gilbert capture well the two extremes that many Christians risk falling into: making work their idol on one end, or rejecting it as anathema to God’s purpose for their lives on the other end.
There is nothing wrong with ambition or determination in our careers. However, the authors rightly point out that “trouble starts when our pursuit of enjoyment or influence or status in our work begins to make our work the source of ultimate satisfaction or meaning for us” (page 25).
Equally damaging on the other end of the spectrum is ‘idleness’ at work. Idleness here does not necessarily mean to be idle per se (while others provide for you), but rather a more subtle expression “that has less to do with productivity of our hands and everything to do with the motives and desires of our hearts” (page 35).
Chapters III to V take the discussion further and develop guidance on issues such as the gospel in work, God’s purpose for us, and choosing a job or career path. An interesting point is made on the correct order of priorities when making career choices expressed in the form of a pyramid. God sits at the foundation, serving others is in the middle, and loving the ‘self’ is the tip of the pyramid coming third (page 75). The book recognises that in reality, these priorities are often reversed: the self comes first, pleasing others is second, and serving God is third (page 79). The authors propose that as a remedy Christians must keep the right perspective: work is temporary, God is eternal (page 81).
Chapters VI to VIII continue with practical applications such as balancing work with faith and family, managing work relationships, and what it means to be a ‘Christian boss’. A useful discussion can be found on the nature of competitiveness in the workplace where the authors (rightly) argue that, “It’s not competition the Bible forbids, but rather the world’s playbook for competition. […] Win by running faster not by tripping all your competitors” (page 106).
The final chapters IX to XI take a more outward look and consider topics such as sharing the gospel in a secular space, the value of full-time ministry, calling, and defining success. On the latter the book makes the point in not defining ‘success’ by what the world considers ‘success’ but rather in the ability to one day stand before Jesus and say “Lord, where you deployed me, I served well. I gave it my all. I worked at it with all my heart because I was working for you, not for human masters” (page 158).
In concluding, “The Gospel at Work” is an excellent resource for anyone interested in the topic of faith within the workplace. It combines practice and theory well, using clear examples and principles that are backed by scripture. One point of contention could be that the authors write with great certainty. On one level this is perhaps not bad thing but on another it does, at times, make the book read like a ‘self-help’ piece of literature – one that was made to hit bestselling charts. Problem A is solved by doing X, Y, Z. I am sure, however, that this was not the author’s intent.
It is perhaps more of an observation than a direct critique. Yet one cannot help but feel that God’s “…ways are above [our] ways…” (Isaiah 55:9). There is an element of God’s mystery in life that often cannot be solved by simply following a clear set of instructions (good and correct though they may be). This perhaps an aspect that could have been developed more in the book. Nonetheless, it is a recommended read for anyone with an interest in the subject.
“The Gospel at Work” by Sebastian Traeger & Greg Gilbert was published in 2018 by Zondervan, 160pp.
Andrei E. Rogobete is the Associate Director of the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.
The Royal Academy of Engineering predicts that algorithms or Artificial Intelligence (AI), will become prevalent in “…most, if not all, aspects of decision-making” (April 2017). Algorithms benefit from a growing presence in key areas such as government, healthcare, education, financial industries, and of course, technology. Yet this is for good reason: they are highly efficient and effective, certainly far more than the average person. This is particularly true when dealing with large amounts of data where algorithms simplify complexities and present them in a more digestible, applicable form. In sectors such healthcare, algorithms quite literally save lives.
However, increasingly complex and penetrative algorithms can lead to some less desirable outcomes. They may lack nuance to changing scenarios, they may be unable to deal with subjectivity, or in certain cases their output may appear brutish.
This raises serious ethical and moral questions: can a degree of morality or ethical values be implemented within algorithms? Can they be made to reflect societal views and norms? Can we even agree on any particular set of ‘common values’? If so, how or to what degree might they be implemented within the structure of algorithms? These are just a few of the broader questions raised by “The Ethical Algorithm: the science of socially aware algorithm design” by Michael Kearns and Aaron Roth.
The authors bring together a comprehensive list of credentials. Dr Kearns has spent his career in the field of computer science and worked with AT&T Bell Labs where he was appointed head of the AI department. Dr Kearns is currently a Professor at the University of Pennsylvania and Chair of the National Center within the Department of Computer and Information Sciences. Dr Routh also has a background in computer science and is currently Associate Professor at the University of Pennsylvania. His research interests include Data Privacy, Game Theory, Machine Learning, and Algorithms.
The aim of the book is to dive “…headfirst into the emerging science of designing social constraints directly into algorithms, and the consequences and trade-offs that emerge” (page 16). More specifically, the book argues that in order to, “…make informed decisions we need to be able to understand the consequences of deploying certain kinds of algorithms and the costs associated with constraining them in various ways” – whilst acknowledging that technology alone may not be able to “…solve complicated social problems” (ibid).
An intriguing truth is that we are the data (page 2). We are not just users of data but through our activity we become creators of data. More importantly, the data in turn is being used to make decisions about us and sometimes, as the book points out, these can be very “consequential” decisions.
The structure of the book is devised in six chapters and the language is aimed at a non-specialist audience. However, there some “technical “parts that may require more of the reader’s attention and time. This will likely cause prospective readers to go through certain sections or chapters at a differing pace.
Chapters I and II look at issues surrounding privacy and the concept of ‘fairness’ within algorithmic design. There is an interesting reflection on how Netflix has used movie preferences of users to potentially reveal highly sensitive information such as sexual orientation, political affiliation and personal interests (pages 24-26). It demonstrates how an initial privacy agreement can rather quickly escalate into a much greater issue with significant consequences.
Chapters III and IV further the discussion by attempting to analyse various social outcomes of algorithmic design. This section also considers some of the shortcomings of the scientific data on algorithms. The internal structures of common navigation apps such as Google Maps and Waze are discussed and it becomes quite intriguing to discover how they can coordinate traffic around congested areas to yield the best possible outcomes in terms of time and distance of travel. For instance, the ‘Maxwell Solution’ (page 105) poses an algorithmic conundrum: the quickest route of each individual driver is not congruent with the quickest route for all drivers collectively.
Chapter V and the Conclusions reflect on the societal and ethical implications. The authors themselves recognise that algorithms are playing an increasing role in people’s lives. In new technologies such as autonomous transportation, healthcare, or defence, there may be decisions that “…we never want algorithms to make, period – even if they make them ‘better’ than humans” (page 176). It is argued for instance that the decision to kill another human being should never be taken solely by an algorithm (page 178).
“The Ethical Algorithm” by Michael Kearns & Aaron Roth is recommended for anyone with an interest in technology and the ethical implications of our increasing use of algorithms. That is not to say that it is flawless – one can sense that at various points throughout the book the authors become overly zealous in viewing the world exclusively through a computer science lens. Everything becomes a problem that computer science can fix (or at least try).
We must be realistic that there is a fine line between automation and human input. Managed poorly, it can result in catastrophes like the crash of two brand new Boeing 737-Max 8 jets. We all want to increase efficiency but what is the exact cost of losing the ‘human touch’? Indeed, can we even agree on exact “societal norms” and “values”? Not only are they constantly evolving concepts, but they are also highly subjective in parts. Does this mean that certain algorithms would have to be continuously updated to “reflect” society’s shared values? And who is to determine what these values are? These are questions that require careful consideration and thorough answers. It is for our benefit because one thing is for sure: algorithms will play an increasing role in the public and private spheres.
“The Ethical Algorithm” by Michael Kearns & Aaron Roth was published in 2019 by Oxford University Press, (ISBN 0190948205, 9780190948207), 232 pp.
Andrei E. Rogobete is the Associate Director of the Centre for Enterprise, Markets & Ethics. For more information about Andrei please click here.
The Future of Capitalism tackles one of the big issues of our time. Its impressive author, Sir Paul Collier, CBE, FBA is a distinguished member of the Blavatnik School of Government at the University of Oxford and a seasoned practitioner in development economics for which he received a knighthood. He is convinced that capitalism is the only economic system which can generate mass prosperity. Regrettably it has also divided societies, created dysfunctional democracies and posed risks to the planet. More than that he claims it is morally bankrupt. The challenge he set himself in this book is how to restore ethics within capitalism to prevent it drifting into either a totalitarian state (China) or populist nationalism (East European countries). In doing so, he eschews ideology claiming that all his policy prescriptions are based on evidence, analysis and pragmatism.
The inspiration for the book was Anthony Crosland’s The Future of Socialism, published in the 1950s, which set an agenda for the social democracy of the post war years in the UK. (To some readers Anthony Crosland might seem a minor figure out of a history book, but in his heyday he was the leading UK intellectual of the centre left and a Cabinet minister in the Wilson and Callaghan Labour Governments attempting to put his ideas into practice). Collier claims that the Crosland agenda worked well between 1945-70, even at one point describing it as the “miracle period”. It failed however because it neglected its roots in the ethical foundations of the nineteenth century cooperative movement.
It was replaced by a combination of Utilitarian technocrats (mainly economists) intent on redistributing income to those below the poverty line (however defined) and lawyers committed to John Rawls philosophy which promoted the rights of disadvantaged groups based on race, gender, sexual preference and so on, which has become the basis for identity politics.
Both of these philosophical approaches emphasise the individual not the collective and differences between groups based on either income or disadvantage rather than the needs of persons and families. Each elevates a single moral prescription, “the greatest happiness of the greatest number” and “laws in a society must be designed for the most disadvantaged groups”. However, they neglect the normal moral instincts and values of people such as loyalty, fairness, obligation and desert which were central to the cooperative movement.
The philosophical foundation which Collier builds on is found in the writings of David Hume and Adam Smith (especially The Theory of Modern Sentiments) and the Pragmatism of nineteenth century American philosophers such as William James and Charles Peirce. After laying this down he devotes four chapters to restoring ethics within the state, firm, family and world. Then, in the final section he presents a plethora of ideas for restoring an inclusive society.
To tackle the geographical divide, he proposes taxing the metropolis and regenerating broken cities and regions through establishing local banks, local universities and business zones. Families can be strengthened by preventing them from falling apart in the first place, supporting children in the early years, from pregnancy to the first day of school, raising standards of teaching in schools, offering improved post-school vocational education and extending home ownership. Tackling the negative effects of globalisation requires redistribution of resources to those areas which have lost out through free trade and technology.
In putting forward all these proposals he is not afraid to be controversial. He is scathing about the greed of investment banks. He argues for taxes on financial transactions and raise taxes on the incomes of highly skilled workers especially in finance and law. He wishes to see a new criminal law comparable to manslaughter which he calls bankslaughter. He backs immigration controls, strengthening traditional two parent families from whom they are genetically descended and having less state intervention through social policy dealing with the needs of children.
Although it is not fundamental to the main theme of the book I question Collier’s judgement that the period 1945-70 was as successful as he claims. It is certainly true that the new social contract devised by Beveridge, Temple and others which produced the post war Welfare State and mixed economy lasted the course. However, by the 1960s inflation was back accompanied by rising unemployment, prices and incomes policy were a failure and the nationalised industries were mired in the red, while by the end of the 50s the social infrastructure began to show signs of fraying through increased violent crime, illegitimacy and addiction. Meanwhile, some of Crosland’s policies were proving destructive; “If it’s the last thing I do, I’m going destroy every fucking grammar school in England. And Wales. And Northern Ireland”. By the time of his early death (58 years old) he became so disillusioned with the crisis of capitalism that he thought the creation of a ‘serious revolutionary socialist party’ was worth thinking about.
One question which needs to be asked is whether he has succeeded in the task he set himself, namely restoring ethics to firms, families and states. In the case of firms he devotes an interesting chapter to the way in which ethical firms of the past which he mentions – Imperial Chemical Industries (ICI), Cadbury, The Halifax Building Society – have given way to the vampire squids of today which are held in contempt as greedy, selfish and corrupt.
In order to achieve change he believes competition is an important discipline on business but increasingly limited because of the power of networks (electricity, water, railways) and the role of technology in creating unregulated natural private monopolies (Facebook, Amazon, Google, eBay and Uber). The conventional responses to these problems are regulation and public ownership, but both have severe limitations. As an alternative he suggests taxing economic rent, which by definition does not discourage productive activity or risk taking; reforming corporate law so that concern for the public interest should be mandatory for all board members, such as Public Interest Companies in the US; and introducing the new criminal offence of bankslaughter.
The problem with all these, which he recognises is that regulations can be got around by talented management, taxes reduced by clever accounting and laws fudged by legal argument. After acknowledging that the cupboard is fairly bare he puts forward the novel suggestion that society needs to build a critical mass of ethical citizens who can judge the behaviour of companies, favourably or not. This is less than a specialised sub-police force and more a form of neighbourhood watch strengthened to have teeth. This may seem fanciful but the achievement of the women’s movement and climate change protests, based on evidence of discrimination or degradation show that great oaks grow from acorns. Post COVID-19 many questions will be asked about the future of our society, so his proposals may not be so fanciful.
To restore ethics to the state he rejects ethnicity, religion and shared values as a way to create shared identity because they are incompatible with modernity, despite the showing of how popular Judeo-Christian based ethics still remain. He plumps for a sense of belonging to place, something which is hard-wired in our psyche, especially the place in which we grew up and which we call home. Unlike Nationalism, Patriotism is an inspiring concept and he claims a good example of it is found in the politics of President Macron. A major raison d’etre of politicians should be to create narratives of shared belonging. To restore the ethical family, he suggests a greater acceptance of mutual obligations by parents in raising children rather than one focused on their own individual, personal success in work.
The one surprising weakness of the book is its treatment of religion. The book contains four references to religion and six to religious fundamentalism. All are wholly negative: religion leads to cultural separation, marriage is tainted by its religious association, it is the basis of a new nationalism, heir to fascism. Religion is almost always qualified by the adjective “extreme”. Jihad pogroms and other cultic, barbaric practices deserve the treatment he delivers and the Christian religion has many shameful episodes in its history. However, if restoring ethical behaviour in business, politics and society requires ethical citizens, ethical politicians and ethical family members, a rejection of self-aggrandisement, ‘freedom is not bound in servitude to the self but in escape from the self’ (p. 108), and strengthening a sense of obligation, surely a religion based on transcendence and true humanism must be a help to the cause.
On the evidence of nineteenth century history in the work of Gertrude Himmelfarb and Christie Davies, the irony is that ICI, Cadbury and The Halifax Building Society were deeply rooted in a late nineteenth century Christian culture, especially non-conformist, which was also an inspiration for the cooperative movement, friendly societies and the social reforms of the period. Non-conformity would also at this time have been a major force in Collier’s beloved Sheffield.
I enjoyed book but at the end it left me with a nagging question. It certainly respects the evidence, applies analysis to good effect and makes a number of interesting practical proposals. However, its conclusion is that religion has no place in the future of capitalism. In its neglect of the positive contribution of the Christian faith on British life and culture I fear it has strayed across the boundary of social science into ideology.
“The Future of Capitalism: Facing the New Anxieties” by Sir Paul Collier was published in 2018 by Harper Collins (ISBN 978-0062748652). 256pp.
Lord Griffiths is the Chairman of CEME. For more information please click here.
As an economic system, unfettered capitalism in the post-recession era has come under considerable scrutiny. Reports of business scandals and misdealings, as well as serious social inequalities, are but a few of the most cited examples. In the face of these criticisms, proponents of capitalism have come to its defence. In “The Ethical Capitalist”, entrepreneur Julian Richer joins these proponents, arguing not only that capitalism is the only viable option but also that, when pursued responsibly, it is a force for good.
The founder and owner of the remarkably successful home entertainment retailer Richer Sounds, the author is five times winner of the Which? ‘retailer of the year’ award. He has been an active supporter of the National Living Wage and has taken up the mantel against tax avoidance and in relation to the housing crisis but he maintains that capitalism can be practiced ethically.
Building on over forty years of business experience, Richer begins his book by setting out his understanding of ‘ethics.’ At this point, the reader might be forgiven for any scepticism towards his somewhat simplistic definitions which often revert to rather superficial ideas of what it means to be ethical – as well as quoting mantras such as ‘what goes around comes around’ and you ‘get nowt for nowt’ (page 29).
However, as Richer really gets going with his practical applications, we start to realise that he may just have some valid points. In the first part of the book, he explains how the ethical business should treat its key players – employees, customers and suppliers. Chapter 1 draws into focus the importance of company culture, revealing how costly practices such as employee fraud, theft and absenteeism are often learnt behaviours from management. Being ethical, therefore, involves actively pursuing a positive work culture, starting at the beginning of the hiring process with honest job adverts, which attract the right candidates. Imploring businesses to follow through with prioritising internal promotions, paying a Living Wage and providing ongoing training opportunities, he makes it clear that this is not simply an optimistic vison for business altruism. By changing the way in which a business relates to its employees, it will minimise the cost of high staff turnover and this can only be positive for profitable success.
Chapters 2 and 3 make a similar case for a more ethical approach towards customers, suppliers and supporters. The overall message is that reputation is critical, in so much as it encourages repeat custom and builds crucial relationships. At times, the examples Richer includes from his own business can almost appear too saccharine, such as the time he delivered flowers to the home of a woman after a poor customer service experience.
Some may also challenge his assumption that customers are always concerned about a company’s conduct, more so than lower prices. Could it be that consumer consciousness of certain issues is only significant in periods of high media attention? Nevertheless, businesses are indeed playing a very short-sighted game when they prioritise crisis management over risk management, in a world of increasing consumer savviness and a ruthless social media scene.
In the second part of the book, Richer goes on to tackle capitalism itself, recommending points of reform and highlighting areas where limitation is both intentional and desirable. In chapter four he demonstrates the compatibility of capitalism and the principle of a National Living Wage. Using both national and international examples, Richer argues that higher wages have not automatically equated to fewer jobs. Instead, they improve a company’s reputation, which in turn boosts profitability. The wage-profitability relationship will no doubt be a contentious issue for many readers.
Richer further argues that we need to name and shame those companies which continue to resist it. Again, the assumption that reputation is a make or break factor in consumer decisions underpins his arguments, but he does provide empirical evidence to support his view.
In chapter 5, Richer critiques Thatcherite individualism, arguing that society is very much a reality. Often conveniently forgotten is that government is essential for business, not least because it provides the very environment required for it to thrive. He argues that nobody is entirely ‘self-made’ and we’re called to consider, who runs the banking system necessary for transactions, creates the laws under which businesses operate and maintains the infrastructure which holds everything together? Here too it is suggested that naming and shaming those who purposefully avoid paying their taxes would be effective, drawing on the Scandinavian model as an example. What exactly Richer views as ‘purposefully avoiding taxes’ could benefit from a more detailed discussion.
Taken from a simple game theory perspective, one might reason that it would require more than this to produce change. Businesses may very well take the view that they can ride out an unpopular image if their product or service is valued highly enough and therefore refuse to be the first in their industry to reform. Nevertheless, if we accept that consumers are becoming ever-more discerning, Richer is right to assert that capitalism doesn’t have to equal the eradication of civil society.
Finally, in chapter 6, we are cautioned that the principles of the free market cannot and should not be applied everywhere. Using privately run prisons as a key example, Richer instead focuses on the separation between ownership and management. Whilst this is perhaps the hardest of his arguments to follow, as it is unclear where exactly we should draw the line, separating complex social needs from simplistic market equations is a refreshing message from a believer in capitalism, who recognises that it need not be all or nothing.
Richer leaves business owners with the charge to get started somewhere in making a difference – and he’s provided plenty of examples and inspiration throughout his book to get them going. Despite possible criticism that his ideas rest upon certain assumptions about motivation for human behaviour, his argument that treating people well is not only admirable but also good for business, is compelling, well-evidenced and convincingly nuanced.
“The Ethical Capitalist” by Julian Richer was published in 2018 by Random House (ISBN-13: 978-1847942197). 192pp.
Georgina Bishop is Senior Editorial Assistant within the Social Sciences at Routledge. She obtained her BA in History and Politics from the University of Nottingham in 2016.
Many books about business management or corporate responsibility use historical situations to illustrate or, at least to the satisfaction of their authors, prove their theories. Quakers, Business and Corporate Responsibility adopts the opposite approach: it examines a particular historical model of business management and corporate responsibility (that of the Quakers) and seeks to draw conclusions and raise questions that are of wider relevance.
It comprises a collection of essays relating to Quaker business practices and their economic and social views, which cover “topics that encompass both a historical and contemporary perspective” (page 1). In particular, as its sub-title (“Lessons and Cases for Responsible Management”) implies, it seeks to address the question, “What are the insights for responsible business practice that may interest contemporary scholars and practitioners?” (page 1).
This may suggest that the book will not interest less specialist readers. However, any such impression would be misleading. There is plenty in the book to engage any intelligent reader who is interested in business and social issues. Several of the essays deal with narrow subject areas (e.g. Karen Tibbals’s essay on the Quaker Employer Conference of 1918, Sue Kozel’s essay on Thomas Jefferson and Paul Anderson’s essay on John Bellers) but all of the essays, even those of limited scope, raise important issues of continuing relevance and most reward careful reading and thought. For example, Anderson provides fascinating insights into the origins of Karl Marx’s views (which may be of greater relevance today than most people would have expected or desired a few years ago).
Many of the authors are Quakers and, in a few places, one may question whether they have been sufficiently critical of the group to which they belong. However, overall the book succeeds in its aim of presenting “a sympathetic, but not uncritical view” (page 2) and, by admitting the difficulties experienced by Quaker businessmen and politicians, assisting in consideration of the problems that face business and society as a whole today.
Books comprising collections of essays by different authors are almost always of uneven quality and this one is no exception. It has obvious weaknesses. There are some simple inaccuracies, such as the statement by Donncha Kavanagh and Martin Brigham that the business innovations pioneered by Quakers include bills of exchange (page 113): medieval Italian bankers would disagree! There are also some overstatements, such as the assertion that the Quakers held “the pre-eminent position” in the commercial world for much of the eighteenth and nineteenth centuries (again in Kavanagh and Brigham’s essay, page 125) and the assertion that “Friends were far-sighted…. in anticipating centuries ago the importance of spirituality to every human being in all aspects of life including corporate life” (in Georgeanne Lamont’s essay, page 18): the pre-eminence of Quakers, whilst highly impressive, was in fact limited to certain business areas, such as banking and confectionary, and the application of spirituality to all areas of life was by no means a discovery of the last few centuries or one to which the Quakers can lay exclusive claim.
More seriously, whilst most of the essays proceed in a cautious and scholarly manner, carefully extracting tentative conclusions from their analysis, some appear to be squeezing the facts into a theory (e.g. Andrew Fincham’s competing values model, page 44) or drawing conclusions that relate only loosely to their analysis (e.g. Tibbals’s “Lessons for the Future”, page 75).
Some of the individual essays suffer from particular defects. In places, Lamont’s essay reads like an advertisement for her consultancy business, whilst Mike King, in his essay about the role of the state (“Honey I Shrunk the State”), self consciously presents his views as a middle course between extremes but defines those extremes (the views of Karl Marx and Milton Friedman, respectively) in such a way as to pre-determine a soft-left landing. He also fails to examine his unspoken assumption that the state can in fact deliver the benefits demanded of it (which history suggests it often cannot) and is prone to ex cathedra statements of a contentious nature (e.g. the statement that “The far-right libertarian assumes that the means of production can be conjured into existence by anyone if given sufficient freedom”, page 83; and his similarly unsupported statement that “the passage of time [has] endorsed the logic of Cadbury [i.e. an interventionist model] rather than Bright [i.e. a more free market approach]”, page 91).
Several of the essays also, rather irritatingly, assume that everyone agrees that “paternalism” (never defined) is a very bad thing without ever considering fairly the possibility that it was the right response to the conditions of the time. Fortunately, in his essay, Richard Turnbull spots this point and, in the context of his comments on voluntary societies, suggests that scholarly criticism of the power relationships, the paternalism and the guilt complexes of the middle class is unfair “not only because of a reading back of contemporary social values but also because it fails to recognise the real impact that such societies had” (page 106). As he then recognises, the spirit of this comment applies more generally to some of the criticism of Quaker businessmen.
Inevitably, the defects take some of the gloss off the book. However, it contains a considerable amount of fascinating and thought-provoking material. John Kimberley pithily and successfully rebuts the suggestion of Hobsbawm and Ranger that Quakerism is an ‘invented tradition’ and this paves the way for the essays that follow. Kavanagh and Brigham’s essay on “The Quakers and the Joint Stock Company”, despite the defects mentioned above, is particularly interesting. It provides a brief but fascinating overview of both Quaker contribution to business from the late seventeenth to the early twentieth centuries and of the history of the modern limited liability company. It should be of interest to anyone who would like to know a little more about these matters and to apply an historical perspective to challenge modern presuppositions about business organisation.
As might be expected of an essay from the Director of the Centre for Enterprise, Markets and Ethics, Turnbull’s essay, “Quakers, Free Trade and Social Responsibility”, performs a similar role. It begins by pointing out that there is “a conundrum” to be solved: Quaker businessmen “were compassionate employers with a genuine concern for their workforce” (page 106) yet Quakers opposed social legislation. For example, Joseph Pease and John Bright were among the leaders of the opposition to Ashley’s 1844 Factories Bill and (as King points out, page 82) Bright opposed legislation to combat food adulteration. Turnbull examines the beliefs and experiences of the Quakers, showing how these things may have led to the combination of paternalist concern and extreme libertarianism that was characteristic of Quaker thinking prior to the late nineteenth century. This leads to a conclusion that would have been suitable as a conclusion for the whole book: the Quaker businessman had many strengths; they “may not have been unique in [regard to their social concern], but that does not make them any less genuine” (page 106); some Quaker employers were more pioneering than others but, as a whole, they were among the pioneers of good employment practices; yet there were failures and blind spots of which “the most important one is the use of child labour in at least some Quaker factories against the increasingly prevailing national opinion” (page 107); more work needs to be done on specific companies but, overall, “We should neither condemn or whitewash” (page 107). We should learn!
“Quakers Business and Corporate Responsibility” edited by Nicholas Burton and Richard Turnbull was published in 2019 by Springer Nature Switzerland AG (ISBN – 13:978-3030-04033-8). 181pp.
Richard Godden is a Lawyer and has been a Partner with Linklaters for over 25 years during which time he has advised on a wide range of transactions and issues in various parts of the world.
Richard’s experience includes his time as Secretary at the UK Takeover Panel and a secondment to Linklaters’ Hong Kong office. He also served as Global Head of Client Sectors, responsible for Linklaters’ industry sector groups, and was a member of the Global Executive Committee.
Colin Mayer is a distinguished professor at the University of Oxford, former dean of the Said Business School and a Fellow of the British Academy . Throughout his career one of his fields of interests has been the business corporation and at present he is director of the Academy’s research programme into the Future of the Corporation.
However neither the title nor sub-title of the book do justice to its contents. The book is nothing if not ambitious. In examining the business corporation the claim is that “it will take you across history, around the world, through philosophy and biology to business, law and economics, and finance to arrive at an understanding of where we have gone wrong, why, how we can put it right and what specifically we need to do about it”.
The remarkable fact is that I believe he has achieved his aim. The book is wide in scope, has considerable depth and is not superficial. It is well written, interesting to read and draws on a lifetime of research into different aspects of the business organisation.
The book is first a sustained and vigorous attack on Milton Friedman’s claim that the sole social responsibility of business is to increase its profits, subject however to doing so in open and free competitive markets, without deception or fraud, while conforming to the basic rules of the society embodied in law and custom. For Mayer the public have lost trust in business precisely because business has followed Friedman’s advice and put the interests of shareholders above other stakeholders.
In its place he proposes a total reinvention of the corporation. Corporate law should be changed so that each company is required to state its ultimate purpose over and above profit, redefine the responsibilities of directors to deliver these new objectives, develop new measures by which they can be judged and introduce incentives to deliver them.
In exploring the purpose of business Mayer distinguishes between ‘making good’ (such as manufacturing cars, or electrical products) and ‘doing good’ (treating employees well, cleaning up the environment, enhancing the well-bring of communities). The latter has a social public-service element which goes beyond the private interests of the firm’s customers and investors, and even beyond section 172 of the 2006 UK companies Act, which already imposes duties on directors to take into account the interests of stakeholders other than shareholders. As examples of successful and enlightened corporations he mentions with approval “industrial foundations” companies such as Bertelsmann, Bosch, Carlsberg, Tata and John Lewis which are set up as foundations or trusts.
While I admire his ability to explore different dimensions of the business in one book, I have serious problems with his argument.
First, the pursuit of long term profitability is essential if a company wishes to prosper in the long term. Long term profit is a great discipline. This applies not just to publicly quoted companies; it applies equally to private companies, B-corps, partnerships, foundations and trusts. If companies of any kind make losses, capital will drain away and either they get taken over or go bust. This applies to all companies even those which are foundations and trusts. Not only that but long term profitability is a pre-condition of companies doing good: being able to reward employees well, help communities, develop new products and services for customers and invest to protect the natural environment. In this context it is important to distinguish between long term profitability and short term profitability.
The pursuit of short term profitability is bad business. Just recall the financial derivative products created by banks in the feverish boom years leading up to the 2008 crisis which ultimately led to some banks going bust and others being bailed out by governments. This was bad business. British Home Stores was a classic example of short term profit maximization with inadequate investment in the business itself or the pension fund. Again short termism leading to bad business.
Pursuing long term profitability is not just a matter of management getting numbers right. Before they can do that it requires them to set out a vision which makes the firm “a great place to work”, ensures customers recognize value for money in what they buy, becomes known as an ethical organization by the way they conduct business and admired by shareholders for earning a superior long term return to capital.
A second problem with Mayer’s proposals is the sheer complexity of managing the diverse and frequently opposing interests of stakeholders. It is logically impossible to maximize in more than one dimension. If managers have to manage the interests of all stakeholders they need to be able to make meaningful tradeoffs between competing interests. Profit or change in long-term market value is a way of keeping score in the game of business. Michael Jensen and others have shown that in the long term prospective profit maximization and shareholder maximization amount to the same thing. The use by management of a balance scorecard is no better as it ultimately gives no objective way in which to weigh all of the elements in the scorecard to arrive at a single figure.
A third problem with Mayer’s argument is accountability. “Accountability to everyone means accountability to no one”. The author’s proposal is a revolutionary re-definition of property rights within a modern corporation to make it “trustworthy” but to whom is the board of this new “trustworthy” corporation responsible? And what are the rights of ownership over the funds invested in the business? Already in the US the number of publicly traded companies quoted on exchanges has roughly halved over the past 25 years. One reason is the increasing cost of regulation: another is the availability of private equity finance. If Mayer’s proposals were ever to be implemented they would constitute a major disincentive for companies to raise capital through the public markets and only accelerate the decline in stock market listings.
In Mayer’s proposal shareholders would become providers of capital to business rather than owners of the business. The general public have never had a great trust in business which is why ever since the Industrial Revolution governments have stepped in to control business through laws passed by parliament, regulation, mutualisation, nationalization and state ownership. Mayer’s proposals will downgrade the existing well defined ownership rights which exist in publicly traded companies and replace them with a form of ‘social’ decision making in which the leadership of the company is answerable to trustees but shielded from competition in the market place through take over bids. A sure way to create inefficiency.
In this respect these proposals are a far cry from an exercise in academic research, more a political statement. Far from having no objection to the existence of ‘trustworthy’ corporations as one of many different forms of corporate ownership, I welcome them. In terms of corporate structures let a hundred flowers bloom. If the author was making a case for the idea of ‘Industrial corporation’, fine. However he is doing more than that. He is making the case for eroding private property rights and restricting what companies can do, which is as much a political statement as one based on objective analysis.
“Prosperity: better business makes the greater good” by Colin Mayer was published in 2018 by Oxford University Press (ISBN: 978-0-1988240-08). 288pp.
Lord Griffiths is the Chairman of CEME. For more information please click here.
Economics is a social science. It relates to the behaviour of human beings and its success as a science turns to a considerable extent upon its ability credibly to model that behaviour in such a way as to enable reliable predictions to be made.
Neoclassical economists have focused on the concept of utility maximisation as a governing model (“Mr Maximise Utility” or “Max-U”). This approach has come under sustained attack in recent years and Nobel Prize winning economist Vernon Smith and his colleague at Chapman University, Bart Wilson have been at the forefront of these attacks. Humanomics is their latest salvo. It brings together in a concise form (the book being only 207 pages long) the research and thinking that they have undertaken over the past couple of decades.
Smith and Wilson accept that Max-U “served well-enough the observational demands of decision in market supply and demand experiments under perfect enforcement of property” (page 159) but they point to its failure to account for the results of two person trust game experiments of the past 30 years. They argue that a new theoretical model of the relevant human behaviour is necessary, and they seek this in Adam Smith’s first book, The Theory of Moral Sentiments (1759). They suggest the theory put forward in that work both explains modern experimental results and has predictive force.
Most prospective readers of Humanomics will have heard of Adam Smith’s later and more famous work “An Inquiry into the Nature and Causes of the Wealth of Nations” (1776) but it is likely that few will have read The Theory of Moral Sentiments and many will question whether a largely forgotten book written over 250 years ago is worthy of resurrection. However, few will have any doubts on this score once they have read what Smith and Wilson have to say about it.
The first half of Humanomics largely comprises an explanation of the perceived problem in the concept of utility maximisation, the dismissal of previous attempts to solve that problem and a detailed analysis of Adam Smith’s theory. It includes a close examination of Smith’s terminology, which is vital since some of his key concepts are no longer in everyday use (e.g. “beneficence”) and others of them are used in a sense that does not quite correspond to some modern usage (e.g. “sentiments”). Having done this, Smith and Wilson move on to extract various axioms, assumptions and principles from Smith’s work. Some of these may seem self-evident but the reader may have a sneaking suspicion that many economists have forgotten them (e.g. “Axiom 1: Human beings fellow feel with each other”, page 71). Others are less obvious but appear to correspond with everyday experience (e.g. “Axiom 4: As compared to a normal baseline condition, human beings experience an asymmetrical change between feeling something good (e.g. joy) and feeling something bad (e.g. sorrow)”, page 73 – an axiom which is evidenced by the disconcerting fact that vendettas tend to have rather longer lives than alliances).
Smith and Wilson particularly stress Adam Smith’s concepts of “fellow feeling” and “the impartial spectator”. Quoting Deirdre McCloskey’s Bourgeoise Equality (which is reviewed on this website), they point out that we misunderstand Adam Smith if we focus solely on his concept of the invisible economic hand of the market place: Smith saw two invisible hands, the second being the social hand of the impartial spectator (pages 5-6). We are social beings and, as Adam Smith put it, “we endeavour to examine our own conduct as we imagine any other fair and impartial spectator would examine it” (page 75).
Having set out their theoretical stall, in the second half of the book, Smith and Wilson move on to summarise the results of the trust game experiments of recent years and explain them by reference to the theory. They suggest that this provides a convincing explanation of a number of the experimental observations. For example, they suggest that it explains why many people are willing to take a financial risk by trusting another person (even an unknown stranger) to “do the right thing” and why a clear majority of people, having been trusted in this way, prove trustworthy even though they could benefit financially by being selfish and even though this selfishness would never be known to anyone other than themselves. It may even explain the counter intuitive fact that the addition to the trust game of a mechanism whereby the first person can financially punish the second if they are selfish increases rather than reduces the incidence of selfish behaviour
Humanomics is a dense book that requires detailed study. It also contains a significant amount of mathematical and quasi-mathematical propositions, which will put off some readers. However, it repays careful attention, most of the maths will be understood by those who have some experience of formal logic and, since all of the key arguments are explained verbally, other readers can skip the maths without thereby losing the thread of the argument (although, in a few places, they may worry that they have missed something).
Inevitably, the book has shortcomings. For example, in places, it betrays the fact that large parts of it comprise reworked papers published previously by the authors and other collaborators (e.g. there is a lot of repetition and the end of chapter 10 reads like the climax of the book even though three more chapters follow it). More seriously, many readers will find the explanations of the experiments so compressed as to be hard to follow, at least without reading on and then referring-back to earlier parts of the book. Furthermore, the book does not explore the economic or policy implications of the experimental results and theoretical explanations advanced in it, although it contains tantalising hints of some of these (e.g. the comment that some “features of good conduct cannot be extorted, coerced or legislated”, page xv).
More seriously, whilst the authors have done an excellent job in analysing Adam Smith’s theory of moral sentiments, they have barely scratched the surface of a critique of it. Of course, at a high level, they are arguing that its predictive power suggests that is passed the test of being a good theory. However, a close examination of their experimental results suggests that the predictive value may not be as great as they would like to believe. Furthermore, they don’t examine the origins of the sentiments that Smith finds in human beings: they accept Smith’s assertions that either “they seem to have been given us by nature” (page 46) or they arise inexorably from the process of socialisation (e.g. page 74).
For some purposes, this deficiency doesn’t matter but many Christians and other theists will wish to suggest that there is a deeper, more fundamental explanation of human nature. Furthermore, the failure to examine closely the origins of human sentiments leaves open the question whether and to what extent they may be culturally relative and thus less universal than Adam Smith believed. For example, it may be that, at the very high level of generality dealt with by the axioms, principles and assumptions identified by Smith and Wilson, human sentiments are universal. However, what humans perceive to be worthy of gratitude and resentment (to quote Axiom 3, page 71) and, more generally, what is perceived to “satisfy our social impulse” (Principle 1, page 74) may vary from time to time and place to place.
Deirdre McCloskey considers the impact of changes in ideas in works such as Bourgeoise Equality and articles such as Adam Smith Did Humanomics: So should we (2016) and Max U versus Humanomics: a critique of neo-institutionalism (2015). It is clear that her theories and those of Smith and Wilson are related but it would be interesting to explore further whether, ultimately, hers are more subtle and ultimately more persuasive than those of Smith and Wilson or, for that matter, those of the great Adam Smith himself.
That said, one should not criticise a book for not being the last word on a subject or for giving rise to questions that require further attention. Humanomics is deeply thought provoking and, although not an easy read for the non-specialist, should be read by those who want to think further about human economic behaviour.
“Humanomics: Moral Sentiments and the Wealth of Nations for the Twenty-First Century” by Vernon L. Smith and Bart J. Wilson, was published in 2019 by Cambridge University Press (ISBN 978-1-316-64881-0). 207pp.
Richard Godden is a Lawyer and has been a Partner with Linklaters for over 25 years during which time he has advised on a wide range of transactions and issues in various parts of the world.
Richard’s experience includes his time as Secretary at the UK Takeover Panel and a secondment to Linklaters’ Hong Kong office. He also served as Global Head of Client Sectors, responsible for Linklaters’ industry sector groups, and was a member of the Global Executive Committee.
Kenneth Barnes currently holds the Chair in Work Place Theology and Business Ethics at Gordon-Conwell Theological Seminary. As might be expected, therefore, Redeeming Capitalism is about the theology and ethics of business. Its basic argument is simple: the capitalist economic system that now exists is not the same as that which has existed in the past and, specifically, is not that endorsed by Adam Smith; it suffers from serious flaws that derive from a “moral vacuum” (page 1), which is itself a product of post-modern thinking; yet no other economic system provides a better workable alternative, the thinking of writers such as Picketty and Poole is hopelessly Utopian (pages 81 and 86, respectively) and the solution does not lie in regulation (page 59); what is needed is, essentially, moral reformation and the replacement of “post-modern capitalism” (Chapter 6) with “virtuous capitalism”, being capitalism based on Aquinas’s cardinal virtues (Chapter 13).
There is little to criticise in this as an overall thesis. However, below this very high level, much of what Barnes says is superficial, questionable or simply wrong. Indeed, it is an example of the kind of thing that, a generation ago, Peter Bauer memorably described as “ecclesiastical economics”.
The book is littered with errors. Some of these are minor (e.g. the statement on page 23 that the lingua franca throughout most of the Roman empire was Greek). However, others are more serious. In particular, Barnes’ attack on the behaviour of investment banks in the run up to the Global Financial Crisis is undermined by mistakes such as his definition of derivatives as instruments predicated on the “anticipated performance, or cashflow” of the underlying assets (page 4, emphasis added) and his assertion that, whilst what people do with their own money is largely their business, the problem is that “investment banks deal with other people’s money, and the morality of gambling in the context, is at best, questionable” (page 7). The definition is only true of some derivatives; the assertion fails to recognise that it was proprietary business (i.e. banks dealing for their own account) that lay at the heart of the Global Financial Crisis, not agency business.
Overall, Barnes’ attack on modern capitalism is long on eye-catching statements and short on justification. His stark statement that “the cause of the Global Financial Crisis and the recession that followed was corporate greed and mismanagement” (page 71) is a case in point, as is his assertion that there is a “consensus that the financial services sector is rigged and that corruption and collusion between banks, central banks, regulators, and politicians is rampant” (page 75).
Furthermore, scattered through the book are remarks about particular issues that fail to engage with the underlying arguments. For example, his statement that “on average, women are paid about 20% less than men across the entire spectrum of the economy” (source unstated) followed by the assertion that “the numbers are simply too extreme not to be attributable, at least in part, to gender discrimination” (page 127) is inadequate. His statement (this time sourced) that “nearly eight per cent (7.8%) of Morgan Stanley’s employees went to Ivy League schools even though they represent less than one half of one per cent. (0.4%) of university students” (page 127) is not in itself problematic. However, he implies that the success of Ivy League students is the result of nepotism and is an “economic injustice” (page 128) but he never presents evidence to support these claims.
Barnes’ comments on the living wage are likewise superficial. He says that “Those who oppose this concept argue that it interferes with the free market and is therefore a fundamentally bad idea” (page 138) and later asserts that “It seems obvious to some … that the only real objection to the establishment of the living wage is the short-term effect it would have on company profits” (page 138). He has clearly not absorbed the writings of those like Thomas Sowell who presents cogent reasons for thinking that the living wage harms those it is supposed to protect.
A substantial part of the book is taken up by what Barnes concedes is “a very concise history” of economics (Chapter 2) and analyses of the views of Adam Smith, Karl Marx, Max Weber and some modern writers (Chapters 3 to 7). These chapters contain interesting material. Barnes highlights some points raised by Adam Smith that many today forget and rightly pinpoints some serious deficiencies in the views of others. However, the result of this is that Barnes doesn’t turn to his proposals until page 91 of his 207 pages. Rather less history would have left room for rather more precision in Barnes’ analysis of the current situation and his proposed remedies.
Unfortunately, the proposed remedies rarely go below a high level of generality and such specificity as he provides is unconvincing. For example, he mentions credit unions and micro finance initiatives but clearly they cannot constitute the solution to the macro problems of the world economic system. More seriously, his suggestion that we need to move from a system based on contract to a system based on covenant is bizarre. He suggests that “covenants are sacred oaths of mutual inter-dependents and fealty between two parties dedicated to a common cause” and that “Unlike contracts, which are based upon suspicion and anticipate violation, covenants are built upon mutual respect and trust and presume co-operation” (pp 164/5). Barnes never explains what he believes should happen in the commercial world in consequence of this but, in any event, what he says is not true. One can define words to mean anything but, in the commercial world, contracts are by no means always based on suspicion and by no means always anticipate violation. Indeed, normally, they simply define with precision the subject matter of the transaction, allocate risk and generally record the mutual understandings of the parties. Disputes are the exception not the rule.
The reader is provided with no ideas as to how in practice “virtuous capitalism” might be brought into being and, having finished the book, is likely to be left wondering whether he has simply been asked to favour moral good against immorality. Indeed, the reader might wonder whether, despite Barnes’ attacks on Utopianism, he has merely had his own dream of Utopia.
Barnes may have anticipated this criticism since, right at the end of the book he asserts that “This book is not the manifesto of a movement, but is the credo of a community that refuses to underestimate the power of God to do the impossible against great odds” and continues “Redeeming capitalism is not a project; it is a mission” (page 206). Giving people the desire to effect change and the hope that it can be achieved is worthwhile yet, after 200 pages, one might have hoped for more than simply “I believe in virtuous capitalism”!
“Redeeming Capitalism” by Kenneth J. Barnes, was published in 2018 by Wm. B. Eerdmans Publishing Co. (ISBN 978-0-8028-7557-0). 207pp.
Richard Godden is a Lawyer and has been a Partner with Linklaters for over 25 years during which time he has advised on a wide range of transactions and issues in various parts of the world.
Richard’s experience includes his time as Secretary at the UK Takeover Panel and a secondment to Linklaters’ Hong Kong office. He also served as Global Head of Client Sectors, responsible for Linklaters’ industry sector groups, and was a member of the Global Executive Committee.
The great contribution of this book, edited by Alex Nicolls, now a Professor at the Said Business School in Oxford, is that it brings together in one place, and for the first time, the exciting stories of social entrepreneurship, analysis of issues and the academic research agenda. In doing so, the book is well-placed to look forward.
Social enterprise and the wider agenda of social entrepreneurship is a creative and innovative agenda of new initiatives to deal with social need, harnessing business approaches to social objectives. Alex Nicholls, in his introduction, notes that has been ‘an unprecedented wave of growth in social entrepreneurship globally over the last ten years’ (page 3). Indeed, as another author in the compendium says, the ‘hallmark of social entrepreneurship is its’ ability to combine social interests with business practices to effect social change’ (page 205). The sector is not only expanding but in the light of ‘government failure’ or ‘social market failure’ new partnerships between the market, the state and civil society are essential. This of course raises questions of capital, of the place of philanthropy and so on which the book begins, but only begins to address.
The book is divided into four parts: New Perspectives, New Theories, New Models and New Directions. My only quibble is it is not all ‘new’ but it is all together in one place. The first section consists of the inspiring stories, the second of the academic research base, the third of approaches and paradigms around social entrepreneurship and the fourth challenges for the future. The variety of voices is both helpful and slightly confusing. It is excellent to bring praxis and theory together, but the style and tone did sometimes seem slightly discordant between chapters. Some of the academic chapters were somewhat turgid and somewhat repetitive. Consequently, they felt the least integrated. The answer really lies in recognising this is a first-class reference book and probably not to be read cover to cover in a single sitting.
The book it at its strongest in setting out the vision of practitioners and also setting out the different structural approaches to social entrepreneurship. Muhammed Yunus gets the volume off to a visionary start. Yunus founded Grameen Bank providing credit and loans to the poorer sections of Bangladeshi society. The loans range from study loans, micro-finance for establishing small businesses to loans for housing. The record speaks for itself, Grameen Bank ‘lends out half a billion dollars a year, in loans averaging under $200 (£116) to 4.5m borrowers, without collateral, and maintains a 99 per cent repayment record’ (page 44). One cannot help wonder whether domestic debates around credit, finance and even the role of credit unions in the UK seems rather stale when compared to more market-orientated social solutions? Yunis is clear that profit is not a dirty word. Bill Drayton, founder of Ashoka, refers to the productivity gain by bringing together business and social systems ‘that have not talked for centuries’ (page 51).
Certainly, for those for whom this field is relatively new, chapter 10, dealing with the variety of structural models of social entrepreneurship is essential and helpful reading. The basic distinction is between embedded models (the social programme is fully expressed within the organisation’s business, for example, the provision of health education through a for-profit business model), integrated models (the programmes are linked, for example, the provision of health education to poorer communities funded by the sale of health education on commercial terms elsewhere) and external models (the programme are not linked, for example, health education is funded by the commercial sale of a different product in a different market). There are, of course, many hybrids. Amongst the more conceptual chapters the challenge of bringing social entrepreneurship to the academic table, developing curricula and inter-disciplinary rigour whilst maintain a practitioner approach was an interesting read (chapter 13).
The book raises a number of important questions for the future. Conceptually the development of the idea of ‘blended value’ is an essential building block in the development of new rapprochement between enterprises which seek an economic return and those that seek a social return. These categories are not mutually exclusive. The provision of capital and indeed the availability of appropriate financial products (e.g. social impact bonds) and investors are increasingly recognised as essential to the future development of the sector and raise questions that really belong to the period after this book’s first publication.
Alex Nicholls has done a great service in putting this material together and into the public domain. Yes, the volume is probably more of a reference resource but it is none the worse for that. To put academic research and market practice together is an important linkage too often not made. As suggested, things have developed and moved on further and it seems to me that a new volume would be beneficial. The field is an increasingly important one; and we need to do everything possible to encourage innovative thinking and the placing of this material into context, conversation and collaboration.
“Social Entrepreneurship: New Models of Sustainable Social Change”, edited by Alex Nicholls, was published in 2006 by Oxford University Press (ISBN – 10: 0199283885). 498pp.
Dr Richard Turnbull is the Director of the Centre for Enterprise, Markets & Ethics (CEME). For more information about Richard please click here.